TMI Blog2010 (12) TMI 754X X X X Extracts X X X X X X X X Extracts X X X X ..... on the business in the interest of employees, return was filed by AOP-13 consisting of the erstwhile 13/12 partners for accounting profits and seeking depreciation in the assets of the firm. AOP-3 have purchased the business of the old firm - the appellants as erstwhile partners are liable to pay capital gains tax on the amounts received by them towards the value of their shares in the net assets of the firm and are liable for payment of capital gains under section 45 of the Act. - Answered the substantial question of law in favour of the Revenue and against the assessee. Slump sale - Held that:- contention of the assessee that the sale is in the nature of slump sale and is not in respect of the separate valuation made and, therefore, not assessable to capital gains cannot also be accepted as it is clear from the perusal of the material on record that the sale that was conducted on the direction of this court among the partners and the consideration received by sale was not by slump sale as the shares of all the partners in the firm which were fixed in proportion to the profit-sharing ratio after the dissolution of the firm and they continued the business as an AOP and not as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nces of the case, the Tribunal was right in holding that the capital gains arising out of the sale of the assets of the firm was assessable in the hands of the out- going individual partners of the erstwhile firm ? (ii) Whether, at any point of time, any AOP comprised 7 outgoing partners had come into existence which can be said to have become the owner of the assets of the firm and had sold the same to theAOP-3 ? (iii) Whether, on the facts and in the circumstances of the case, it can be held that the transfer of business of the firm as going concern in favour of the association of three persons was merely relinquishment of shares held by the other outgoing partners ? (iv) Whether, in the facts of the present case, the Tribunal was right in concluding that the capital gains arising out of the sale of the business of the firm as a going concern was liable to be assessed in the individual hands of the erstwhile partners, except the three, who as an AOP have purchased the assets of the firm ? (v) Whether the sale of the assets of the firm was a slump sale and if so, whether it was liable to capital gains tax ? (vi) Whether the Vice President of the Tribunal h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enoy D/o M. Janardhana Rao 7.55 12. M. Gopinath Shenoy 2.50 13. Arathi Shenoy D/o M. Janardhana Rao 7.55 4. Clause 3 of the partnership deed provided for the duration of the firm. This clause reads as under : 3 The duration of the partnership shall be five years in the first instance ; but by mutual agreement the parties hereto may extend the said duration. If during the subsistence of this partnership any of the partners desire to retire from the partnership he or she can do so, if all the other partners agree to the said retirement. However, if all the other partners do not agree to the said retirement, the partner intending to retire shall give six months notice in writing of his or her intention to retire and on expiration of the period of the said notice the said partner shall cease to be a partner and subject to para 14 infra from that date all his or her liabilities and rights as a partner of the firm shall come to an end. 5. Clause 16 of the partnership deed had made specific provisions for the manner in which the affairs of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of this scheme are reproduced hereunder : (i) The dissolved partnership firm, Mangalore Ganesh Beedi Works, as a going concern shall be sold to such of its partner/s, who makes an offer of the highest price, the same not being less than the minimum (reserved) price of ₹ 30 crores (rupees thirty crores) within July 11, 1991, accepting further liability to pay interest at 15 per cent. per annum towards the amount of the price payable to partner/s from December 6, 1987, till the date of deposit . . . (iii) If no offer for purchase of the dissolved partnership firm as a going concern, adverted to in clause (ii) above, is received within the stipulated time or if any of the offers made by the partner/s is not accepted by the court, the official liquidator shall invite offers for purchase of the dissolved partnership firm as a going concern from the public including the partners by giving publicity in three consecutive issues of two English daily national newspapers which have, wide circulation in the country and one Kannada daily newspaper having, wide circulation in Karnataka the time allowed for making offers being at least 45 days between the last publication and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ber 6, 1987, till the date of deposit, within a period of 60 days from September 29, 1994, in any of the nationalised banks in the name of the official liquidator. The rest of our order dated September 21, 1994, remains intact. 9. Pursuant to the above order, the AOP-3 deposited the bid amount of ₹ 92 crores on November 17, 1994, with the official liquidator and as per the order passed by this court, the assets of the firm as a going concern were to be treated as having been sold to the purchasing AOP on November 20, 1994. It is again a matter of record that the business of the firm along with its assets was handed over by the official liquidator attached to this court to the AOP-3 on January 7, 1995, vide his Report No. 10 of 1995 and the sale proceeds along with bank interest accrued thereon were distributed by the official liquidator under the orders of this court amongst the outgoing partners on February 2, 1995. However, the firm could not be wound up due to one or the other reason and the same was continued even thereafter under the supervision and direction of this court and the final order of winding up was passed by this court. However, neither the firm nor t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... their respective interests in the same business and what took place on November 20, 1994, was not the sale as a going concern of the entire business as ordered by this court in the company petition. It is submitted that the AOP-12 is distinct and separate from an AOP of 3. It was this AOP of 12 which was taxed since the firm was dissolved by efflux of time as per clause 16 of the deed for a number of assessment years up to and inclusive of the assessment year 1994-95. During the course of the previous year ending March 31, 1995, for the assessment year 1995-96, the business as a going concern of the said AOP of 12 was sold because of a dispute among the erstwhile partners of MGBW to give effect to the provisions of clause 16 of the partnership deed which provided that only the partners or groups among them could bid for the business as a going concern. Learned counsel further submitted that an AOP of 3 members not the group of the present appellants made the successful bid and the business of MGBW was accordingly handed over to them by this court. These 3 members were also among the 12/13 who constituted the AOP which was carrying on the business till the date of auction of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contracting parties, it was not as if any such contracting parties entered into an agreement where the different assets of a going concern were got valued by them for the purpose of bringing about the transfer and there was no identity of minds necessary for an agreement, etc. It is only when there is such an agreement between the contracting parties which spells out the itemized figures of the various assets comprised in the business, there is a possibility of apportioning the slump sale consideration as laid down by the hon'ble Supreme Court in PNB Finance Ltd. v. CIT [2008] 307 ITR 75 (SC) and where the transfer of the entire business as a going concern involved and the contract indicates item-wise consideration. Section 41(2) would stand attracted with regard to the amount of surplus to the extent of the difference between the written down value of the depreciable asset(s) so transferred and the actual cost thereof. Learned counsel also relied upon the decision of the Supreme Court in CIT v. Artex Manufacturing Co. [1997] 227 ITR 260 (SC) in support of his contention. Learned counsel further submitted that the decision in Artex's case [1997] 227 ITR 260 (SC) will not be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he order passed by the Tribunal is justified. Learned counsel further submitted that I. T. A. Nos. 144, 146 and 147 of 2000 are filed by the Revenue being aggrieved by the directions given by the Vice-President of the Tribunal regarding computation of capital gains which were wholly unnecessary having regard to the facts of the case and, therefore, the said directions issued by the Vice-President may be set aside and submitted that when the Vice-President has passed an order concurring with the decision of other Members, he could not have by himself issued certain directions which cannot be sustained and liable to be set aside and the same is also contrary to the provisions of section 45 of the Act and the sub-section itself states the market value on the date of the transfer and therefore the said observations and directions made by the Vice-President regarding the computation of capital gains may be quashed. 13. In reply, learned counsel appearing for the assessee submitted that the decision relied upon by the assessee is helpful to him even after the inclusion of section 45(3) and (4) with effect from April 1, 1988, and the decision of the Tribunal is contrary to law as per t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e included in the stock-in-trade of the asses- see or if such shares were allotted before the 1st day of April, 1964 : Provided further that nothing contained in section 48 shall apply to the income chargeable under the head 'Capital gains' under this subsection. Explanation.-For the removal of doubts, it is hereby declared that income chargeable under the head 'Capital gains' under this sub-section shall, for the purposes of this Act, be treated as capital gains relating to capital assets other than short-term capital assets. (3) Where any shares in respect of which an assessee is chargeable to income-tax under the head 'Capital gains' under sub-section (2) are transferred by him before the expiry of the period of thirty days referred to in that sub-section, any profits or gains arising from such transfer shall not be included in his total income. (4) Save as otherwise provided in sub-section (3), nothing contained in sub-section (2) shall be deemed to preclude the inclusion of any profits and gains arising from the transfer of any shares referred to in that sub-section in the total income of the assessee for any previous year in which such sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purposes of computing the capital gains, the value of the asset recorded in the books of the firm on the date of the transfer shall be deemed to be the full value of the consideration received or accrued as a result of the transfer of the capital asset. 24.3 Conversion of partnership assets into individual assets on dissolution or otherwise also forms part of the same scheme of tax avoidance. Accordingly, the Finance Act, 1987, has inserted new sub- section (4) in section 45 of the Income-tax Act, 1961. The effect is that profits or gains arising from the transfer of a capital asset by a firm to a partner on dissolution or otherwise shall be chargeable as the firm's income in the previous year in which the transfer took place and for the purposes of computation of capital gains the fair market value of the asset on the date of transfer shall be deemed to be the full value of the consideration received or accrued as a result of the transfer. 24.4 As a consequential measure, clause (ii) of section 47 has been omitted and sub-clause (b) of clause (iii) of section 49(1) has been amended. 24.5 Under the existing provisions where capital gains accrue or arise by way o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year ; or (b) in any area within such distance, not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (a), as the Central Government may, having regard to the extent of, and scope for, urbanisation of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette ; (iv) 61/2 per cent. Gold Bonds, 1977 (or 7 per cent. Gold Bonds, 1980) (or National Defence Gold Bonds, 1980) issued by the Central Government ; (v) Special Bearer Bonds, 1991, issued by the Central Government ; (vi) Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999, notified by the Central Government. 20. The word transfer has been defined in section 2(47) of the Income-tax Act, 1961 as follows : (47) 'transfer', in relation to a capital asset, inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he hon'ble Supreme Court has observed as follows (page 9) : The following conditions need to be satisfied for taxing a transaction as capital gain, viz,. the subject-matter must be a capital asset, the transaction must fall in the definition of 'transfer', there must be profit or loss called 'capital gains' and that the taxpayer has claimed exemption in whole or in part by complying with the legal provisions (like section 54F). Section 45(1) of the 1961 Act speaks about capital gains arising out of 'transfer' of a capital asset. The definition of the expression 'transfer' is contained in section 2(47) of the 1961 Act. It has very wide meaning. What is taxable under section 45(1) of the 1961 Act is 'profits and gains arising from a transfer of a capital asset' and the charge of income-tax on the capital gains is a charge on the income of the previous year in which the transfer took place. Capital gain(s) is an artificial income. It is created by the 1961 Act. Profit(s) arising from transfer of capital asset is made chargeable to income-tax under section 45(1) of the 1961 Act. From the scheme of section 45, it is clear that capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luation made by the chartered accountant, the basic price was fixed at ₹ 30 crores is also not in dispute. The fact that 3 partners (hereinafter called AOP-3) submitted their bid and 7 other partners also submitted their bid and the bid submitted by the 3 partners for ₹ 92 crores was found to be the highest bid and the same was accepted by the court and the official liquidator was directed to receive the amount and distribute the same among the outgoing partners cannot be disputed in view of the specific order passed by this court and the material on record would further show that the final order in the company petition was passed on November 20, 1994, and thereafter the 3 partners who had submitted their highest bid for ₹ 92 crores sought for modification of the order for deleting the direction that amount attributable to them as partners from being deposited and the same was accepted and thereafter the said 3 partners whose bid was accepted have deposited the amount of bid in respect of the shares of 9 other partners and a statement was also prepared regarding the value of the assets of the firm and after deducting the liability of the 9 partners, the net value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dment of the provisions of section 45 with effect from April 1, 1988, and deletion of the clause in the definition of transfer in section 2(47) of the 1961 Act. Profits and gains arising from transfer of a capital asset would clearly show that there is tax for capital gain and the same is attracted as the capital asset within the amendment of section 2(14) has been transferred under section 2(47) of the 1961 Act and the crucial question is as to who are the persons who are liable to pay the capital gain and whether it is the outgoing erstwhile persons who have received the value of the net asset in the firm or capital gains has to be paid by the firm or AOP-13/12. According to the appellants, the appellants are not individually as such outgoing partners of the erstwhile firm MGBW are not liable to pay tax on capital gains as according to them, they have only received their share which they already had in the firm and there is no transfer of any capital asset and, therefore, it is the AOP or firm or AOP-13/12, i.e., liable to pay capital gain tax. The Assessing Officer, the first appellate authority and the Tribunal have held that the capital gain is to be charged to the income of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eased to hold assets of the firm and the assets of the firm were required to be distributed as per clause 16 of the partnership deed. Since there was no mutual agreement among the partners, two of the partners had to approach this court by filing a company petition and thereafter all proceedings pertaining to dissolution of the firm have been conducted under the directions of this court and not by the agreement of the partners. There was no agreement among the partners that the business of the firm should be extended beyond December 6, 1987. There was also no agreement among the partners regarding the distribution of the assets and value of the firm as per clause 16 of the partnership deed and this court in the company petition filed for winding up of the proceedings after dissolution in view of clause 16 of the partnership deed has passed the orders from time to time which clearly show that the said order has been passed to protect the interest of more than 1,50,000 employees of the firm spread all over Karnataka and the sale has been conducted in accordance with the direction issued by this court among the partners. Before conducting the sale, this court has taken care to see tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 30 10,14,85,033 23,75,97,191 17,81,979 23,93,79,170 2. M. Janardhan Rao 8.472 7,79,42,400 81,12,533 5,35,38,900 12,43,60,259 9,32,702 12,52,92,961 3. M. Pushpalatha 13.843 12,73,55,600 1,32,55,641 8,74,80,995 20,31,95,506 15,23,966 20,47,19,427 4. M. Hemalatha 13.843 12,73,55,600 1,32,55,641 8,74,80,996 20,38,55,824 15,28,918 20,53,84,742 5. M. Suresh Rao 8.361 7,69,21,200 80,06,239 5,28,37,435 12,27,49,322 9,20,619 2,36,69,941 6. M. Vatsala Shenoy 8.361 7,69,21,200 80,06,239 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... November 20, 1994, that the proceeding of dissolution is completed and that undertaking shall be given by the outgoing partners in favour of 3 partners whose successful bid was accepted and they should not interfere with the said 3 erstwhile partners carrying on business of the firm in consideration of the amount deposited by them as per the order of this court and in view of confirmation of sale of the assets of the firm in favour of the said 3 persons. Therefore, it is clear that the contention of the appellants that the value of the assets could not be ascertained and, therefore, tax on capital gains could not be imposed cannot be accepted as valuation has been given by the group of partners by assessing the value of the assets and the assets had already been valued by the chartered accountant. Similarly, there is no merit in the contention of the learned counsel for the appellants that since the transaction was only adjustment of shares by the partners and there was no sale as such the appellants were not parties to the same and the same was conducted by the official receiver attached to the High Court and, therefore, the individual partners, the appellants herein who are the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ip. It is true that even during the subsistence of the partnership a partner may assign his share to another. In that case what the assignee would get would be only that which is permitted by clause 29(1), that is to say, the right to receive the share of profits of the assignor and accept the account of profits agreed to by the partners. Lindley on Partnership, 12th Edn. p.375, Ref. to English and Indian Case Law Discussed. [1947] AIR 1947 Lahore 13 [FB] approved ; AIR 1959 AP 380 [FB] affirmed. 29. In Dilip Chinubhai Shah v. CIT [2002] 253 ITR 680 (Guj), a Division Bench of the Gujarat High Court had an occasion to consider the question as to whether on the facts and circumstances of the case, the capital gain of ₹ 34,425 was liable to be included in the income of the assessee. In the said case, Chinubhai Motilal Shah died intestate on February 20, 1965, and was survived by his three daughters, four sons and widow. After his death, one of his properties, a residential house, devolved upon his four sons. By executing a memorandum deed dated March 27, 1973, the said property was given to the HUFs of the four sons. Though the residential house was not partitioned by mete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rty was not owned by any BOI or AOP, the assessee, who was the owner of the one-fourth share of the said property, sold its share on July 7, 1978, and, therefore, the Revenue had rightly taxed the amount which was earned by the assessee by way of capital gains. Let us look at the issue from a different angle. It is the case of the assessee that there was an AOP and the said AOP was the owner of the property and on July 7, 1978, there was a dissolution of the said AOP and the share in respect of each individual had devolved upon different individuals. Had it been so, one-fourth share of the said property would have devolved upon each brother or the HUF of each brother. That is not the case here. In the instant case, by virtue of the deed dated July 7, 1978, only two HUFs had remained the owners of the said property because two HUFs, including that of the assessee, had sold their shares to the remaining two HUFs, who had continued to remain not only owners of their respective share, but they also had become owners of the shares of the two HUFs which had disposed of, by way of sale, their shares in favour of the two remaining HUFs. Thus, the submission of the learned advocate app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partnership is carried on shall vest in and belong to the partner who offers and pays or two or more partners who jointly offer and pay the highest price therefor as a single group at a sale to be then held as among the partners shall be entitled to bid. The other partners shall execute and complete in favour of the purchasing partner or partners at his/her or their expense all such deed, instruments and applications and otherwise aid him/her or them for the registration of his/her name or their names of all the said trade marks and do all such deed, acts and transactions as are incidental or necessary to the said transferee or assignee, partner or partners. The final order passed by this court to wind up the affairs of the firm would clearly show that the property of the firm is purchased by the association of 3 partners who submitted their highest bid and that the other partners had to give an under- taking that they may not interfere with the carrying on business which is vested in the name of MGBW and all the trade marks used in the course of the said business and, therefore, it is clear that the appellants who are the erstwhile partners were not successful bidders for continua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is to be noted that what has been sold in the present case by the outgoing partners is the assets of the firm-MGBW. It is also clear from the facts of the case that while fixing the auction of the assets of the firm-MGBW as a going concern, the value has been fixed on the basis of the report of the chartered accountant obtained as per the direction of this court and also after considering the objections filed by the partners to the said report and reserve price of ₹ 30 crores was fixed and no separate valuation was made. During the auction, three of the erstwhile partners quantified the value of the assets of the firm-MGBW as ₹ 92 crores and the offer made by the other partners quantifying the value of the assets of the firm-MGBW was less than ₹ 92 crores. Therefore, the quantification made by the erstwhile partners themselves has been accepted and what has been sold by the outgoing partners is the assets of the firm Killick Nixon and Co. v. CIT [1967] 66 ITR 714 (SC) and wherefore, the said sale would not be a slump sale. In view of the finding on facts, the decision relied upon by the learned counsel appearing for the assessee in CIT v. Agrosynth Chemicals [20 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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